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Comment by _b8r0 | Hacker News Reader

$10 Billion sounds insane to me. The fundamentals just don't add up. When you consider the user base and their cost base for those users, the number makes no sense.

Consider 25 million users. Even if all 25 million were on the $9.99 plan, that would mean each user pays $119.88 a year, and you're talking a total annual revenue of $2,997,000,000. If everyone was on the $19.99 plan you're looking at annual revenues of $5,997,000,000.

Factor in the storage costs (which I'm sure they'll get a good rate for but don't have any data for) and a $10 billion valuation is simply ludicrous.

The numbers just don't stack up.

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Plenty of non-startup companies trade at 20-100x P/E ratios.

Dropbox is clearly insanely profitable at only 65 employees. Especially because they are running de-duplicated storage on top of highly negotiated AWS pricing (they are likely the biggest AWS customer, and AWS certainly does custom pricing deals for big customers).

And startup P/E ratios should be higher than established companies because you are making a riskier bet for a higher potential payoff.

They could be doing $100 million in revenue (a 4% freemium conversion on their $99/yr plan at 25E6 users) and it wouldn't be crazy at all. Or any number of other configurations.

Your Scenario: (25M * 100% paying* $120/customer * 50% margin)/$10BN= <10 PE Ratio An extremely good deal by any measure.

Alternate Scenario 1: (25M * 10% paying* $120/customer * 50% margin)/$10BN=66 PE

Alternate Scenario 2: (25M * 10% paying* $200/customer * 50% margin)/$10BN=40 PE

Alternate Scenario 3: (25M * 20% paying* $200/customer * 50% margin)/$10BN=20 PE

Btw- I have heard Dropbox has 20%conversion rates so scenario 3 is not that outlandish.

Another way to look at it- if you bought a stalwart tech company (Google/MS/EMC etc) at 66 PE multiple (Scenario 1) at IPO stage- you would have made money 2-3 years from then.

Question - how wide is Dropbox economic moat? Or more simply how low are Switching costs?

I have been analyzing internet companies sometime now for overvaluation and I don't Dropbox (from an outside in looking perspective) is overvalued.

I'd be amazed if Dropbox had a 50% profit (net income) margin. It's likely that their gross margin is around there, but you still have to subtract SG&A and other expenses to get down to net income.

If Dropbox pulls in $100 million in revenue this year, a $10 billion valuation is 100x revenue. That is a very high multiple.

Their storage costs are constantly coming down. I don't know what else they might be cooking up, but with 25 million happy users they could come out with a second product and up their revenue by 20 to 50% overnight. They solve this problem very, very well and are very competently managed.

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